Passive v active

What is the difference between investing in an Active or a Tracker Fund?

Active Investing

The aim of an actively managed Fund is to beat the return from a particular market index or benchmark.

Fund Managers who use an Active investment approach aim to either outperform the market by beating a selected index (such as the FTSE 100), outperform their peer group or achieve a specific investment objective.

They seek to do this by using their knowledge and skill to analyse the market. Then they buy Shares which they believe are presently undervalued and so have potential to increase in price - or pay Dividends over time.

Passive Investing

Passive investment management is the opposite of Active management and will track or closely follow the performance of a particular market index or benchmark such as FTSE 100.

That's why Passive investments are often called Index Funds or Tracker Funds. These have a simple, precise objective; to match a specific index, rather than try to beat it.

  Active Management Passive Management
Approach Aims to outperform the market
An Active Manager selects some Shares and other assets in preference to others.
Tracks a specific index
A Passive Fund reflects the market or a market sector as a whole, and so does not depend on a manager making the right decisions.
Techniques Stock-picking
Active Managers analyse the market in order to identify and purchase investments that are undervalued (and to sell investments that become overvalued).
The replication approach
A very straightforward way to match an index. A manager buys the same Shares as are in the index, in the same proportions as they are weighted in the index.
The sampling approach
Useful when the index is very large or complex. Here, a manager uses mathematical models to buy a range of securities that reflect the index in the key risk factors.
Key benefits In-depth research and potential for out performance
Using skill to find hidden value and exceptional future growth prospects.
Spreading investments across an entire index.

Low costs
Low research costs and low transaction costs
Key risks May be more expensive
Active management costs tend to be higher which will affect the total returns of the Fund.
May underperform the benchmark
Although it aims to beat the benchmark, this is not guaranteed.
Total market risk
Your investment reflects the index the Fund follows, so if the market as a whole falls you will lose money.
Performance constraints
Index Funds are designed to provide returns that closely track their benchmark index, rather than seek outperformance.

If you would like to research Funds now, visit : explore, which will help assist you in coming to an informed decision on your choice of Funds. Our research tool contains a Management Style filter option to allow you to select either Active or Passive Funds.


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